1. Introduction
Economic Analysis
MS 102

2. Learning Objectives
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To introduce key economic concepts like scarcity,
rationality, equilibrium, time perspective and
opportunity cost.
To explain the basic difference between
microeconomics and macroeconomics.
To help the reader analyze how decisions are
made about what, how and for whom to produce.
To define managerial economics and demonstrate
its importance in managerial decision making.
To discuss the scope of managerial economics and
its relationship with various other disciplines and
functional areas.

3. Definition and Scope of Economics
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Economics: Greek word oikos (house) and nomos
(custom or law).
Discusses how a society tries to solve the human
problems of unlimited wants and scarce resources.
Scientific study of the choices made by individuals
and societies with regard to the alternative uses of
scarce resources employed to satisfy wants.

4. Economics: Science or Art?
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Theoretical aspect and an applied science in its
practical aspects
Not an exact science
An “art” as well
A systematic body of knowledge
Unlike science, it lays down precepts or specific
solutions for specific problems
A social science
Deals with the society as a whole and human
behaviour in particular
Studies the production, distribution, and consumption
of goods and services
A science in its methodology, and art in its application

5. Basic Assumptions
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Ceteris Paribus
Latin phrase
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“With other things (being) the same” or “all other
things being equal”.
Rationality
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Consumers maximize utility subject to given
money income.
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Producers maximize profit (or minimize cost)
subject to given resources.
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6. Types of Economic Analysis
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Micro and Macro
Microeconomics (“micro” meaning small): study
of the behaviour of small economic units
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Focus on basic theories of supply and
demand in individual markets
Macroeconomics (“macro” meaning large): study
of aggregates.
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An individual consumer, a seller (or a producer, or a
firm), or a product.
Industry as a unit, and not the firm.
Focus on aggregate demand and aggregate
supply, national income, national capital
formation, employment, inflation, etc.

7. Positive and Normative
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Positive economics
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Establishes a relationship between cause and effect.
Analyzes problems on the basis of facts.
It is “what is” in economic matters.
Normative economics
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Concerned with questions involving value judgments.
Incorporates value judgments about what the economy
should be like.
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It is “what ought to be” in economic matters.
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8. 
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Short Run
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Time period not enough for consumers and
producers to adjust completely to any new
situation
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Some input (usually labour) is fixed and others
(usually capital, etc.) are variable
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Any time period less than a year
Long Run
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Time period long enough for consumers and
producers to adjust to any new situation
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“Planning horizon”
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Decisions to adjust capacity, to introduce a larger
plant or continue with the existing one, to change
product lines
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5 to 6 years, or even as high as 20 years

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Partial Equilibrium Analysis
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Studies the internal outcome of any policy action
in a single market only.
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Examines effects only in the market(s) which is
directly affected, and not on other markets.
General Equilibrium Theory
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Seeks to explain economic phenomena in an
economy as a whole.
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State in which all the industries in an economy are
in equilibrium.

10. Kinds of Economic Decisions
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Macroeconomic Issues
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Are resources fully employed?
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Is the economy growing?
Microeconomic Issues
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What to produce?
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How to produce?
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For whom to produce?
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Are resources used economically?

11. Managerial Economics
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Application of economic theory and the tools of
analysis of decision science to examine how an
organization can achieve its objectives most
effectively.
A means to an end to managers in any business, in
terms of finding the most efficient way of allocating
scarce organizational resources and reaching stated
objectives.
Applies economic theory and methods to business
and administrative decision making.

12. Micro as well as Macro
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Applied microeconomics
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demand analysis, cost and production analysis,
pricing and output decisions
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Macroeconomic
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national income, inflation and stages of
recession and expansion
Normative Bias
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Prescriptive
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States what firms should do in order to reach
certain objectives
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Decides on whether or not the probable
outcome of a managerial decision is desirable

13. Decisions Resulting in Partial Equilibrium
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Helps a firm in decision making
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Decisions taken by any firm would relate to the
equilibrium of that particular firm
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Deals with partial equilibrium analysis

14. Economic Principles Relevant to
Managerial Decisions
Concept of Scarcity
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Unlimited human wants
Limited human capacity to satisfy such wants
Best possible use of resources to get:
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maximum satisfaction (from the point of view
of consumers) or
maximum output (from the point of view of
producers or firms)
Concept of Opportunity Cost
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Rational choices in all aspects of business, since
resources are scarce and wants are unlimited
Opportunity cost is the benefit forgone from the
alternative that is not selected.

15. Production Possibilities Curve
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Shows the different combinations of the quantities of
two goods that can be produced (or consumed) in an
economy at any point of time
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Subject to limited availability of resources
Depicts the trade off between any two items produced
(or consumed).
Represents the opportunity cost concept
Measures opportunity cost
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Indicates the opportunity cost of increasing one
item's production (or consumption) in terms of
the units of the other forgone
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Slope of the curve in absolute terms

16. PPC for the Society
Food
Infeasible Area
P
FP
Q
FQ
Productively
Inefficient Area
O
CP
CQ
Clothing

17. 
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Two goods, food and clothing, are used here to explain
the PPC of the economy.
Point P shows that FP of food and CP of clothing can be
produced when production is run efficiently. So can FQ
of food and CQ of clothing at point Q.
All points on the PPC (like P and Q) are points of
maximum productive efficiency.
All points inside the frontier are feasible but
productively inefficient.
All points to the right of (or above) the curve are
technically impossible (or cannot be sustained for long).
A move from P to Q indicates an increase in the units of
clothing produced.
It also implies a decrease in the units of food produced.
This decrease in the units of food is the opportunity
cost of producing more clothing.

18. Assumptions
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The economy is operating at full employment.
Factors of production are fixed in supply; they can
however be reallocated among different uses.
Technology remains the same.

19. Concept of Margin or Increment
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Marginality: a unit increase in cost or revenue or
utility.
Marginal Cost (or Revenue or Utility) is the change
in Total Cost (or Total Revenue or Total Utility)
due to a unit change in output.
MCn= TCn-TCn-1, where n is the number of units of
output
Change in Total Cost
dTC
Marginal Cost = Change in Total Output = dQ
Incremental: applied when the changes are in
bulk.

20. 
Discounting Principle
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A rupee in hand today is worth more than a rupee
received tomorrow.
Time value of money
Outflow and inflow of money and resources at
different points of time
1
PVF = (1 + ) n
r
where PVF= Present Value of Fund, n = period
(year, etc.) and r= rate of discount